Suppose the price of take-out pizza has been stable for many months at exactly $12.50 per pizza - and Olivier buys 6 pizzas per month at this price.When the price rises to $12.55 per pizza,Olivier's quantity demanded drops to zero.Apparently,Olivier's price elasticity of demand for take-out pizza is
A)-1.
B)0.
C)100
D)6.
E)higher than 10 000.

Question

Quizplus · Accepted Answer

If the price increase from $12.50 to $12.55 led to a drop in Olivier's quantity demanded from 6 pizzas to 0, then the percentage change in price is:
((12.55 - 12.50) / 12.50) x 100% = 0.4%

Using the midpoint formula to calculate the percentage change in quantity demanded:
((Q2 - Q1) / ((Q1 + Q2)/2)) x 100% = ((0-6) / ((0+6)/2)) x 100% = -100%

Then, the price elasticity of demand for Olivier can be calculated as:
% change in quantity demanded / % change in price = (-100%)/(0.4%) = -250

Since this value is greater than 10,000 (i.e. it is very large), we can conclude that Olivier's price elasticity of demand is higher than 10,000, which means that he is very sensitive to changes in the price of pizza.

Suppose the Price of Take-Out Pizza Has Been Stable for Many